Buy-and-hold fails, if the stock is a loser

Value Judgments

Your Money

March 07, 2004|By JANET KIDD STEWART

IT'S ONE of the tenets of buying individual stocks, and real estate for that matter: Buy good companies, or "A" properties in the case of real estate, when they're on sale.

Sounds simple enough. And probably tempting to investors disgusted with revelations that several mutual fund companies allowed market timers into their funds at the expense of longer-term fund shareholders.

Main Street investors love to fancy themselves as the next Peter Lynch, the author and former Fidelity Magellan fund manager who advocates buying stocks of companies you know well as a customer or business partner. These investors fall in love with a new retail store or product and then head straight for Wall Street to snap up the shares.

But as Martha Stewart's shareholders can tell you, a solid brand name can get squishy in a heartbeat.

My own lesson in this phenomenon came more than a decade ago.

A stockbroker noticed my husband and I owned shares of MedImmune, a fledgling biotech company. The broker was pushing shares in UAL Corp., parent of United Air Lines.

He asked us to consider who would be around in 10 years, this relatively obscure medical concern or a giant air carrier. We went with the big, brand-name airline.

Of course, MedImmune went on to introduce the first antibody to prevent serious infections in infants with respiratory virus, and shares soared in the late 1990s. UAL steered toward bankruptcy court, though we had sold the shares long before that for other reasons.

UAL's problems unfolded much more slowly than did Martha's, but the point was that while we should have known better than to buy a cyclical transportation stock to take the place of a growth stock, we lulled ourselves into a comfort level with a stock simply because it was a household name.

With corporate scandal and market volatility fresh in mind but with the stock market rolling again, I asked a couple of veteran stock pickers for some ways an individual investor can size up a potential investment to see if it's tomorrow's success story or a candidate for the corporate perp walk. One believes investors should buy strong individual stocks and hold them for at least several years, the other is a classic market timer and trader .

Phil Dow is equity strategist for RBC Dain Rauscher in Minneapolis and co-author of the new book The Citizen Investor: The Power of Ownership. Dow believes that individual stocks should make up about 45 percent of a portfolio and there should be about 13 companies within that mix - just enough to make up for a couple of losers.

Finding market-leading companies that make high-quality products is a given - and one that astute consumers can usually spot quickly. But Dow puts candidates through several screens before deeming them what he calls "bulldogs," or stocks worth buying and waiting for the next growth wave.

He looks for companies where management turnover is below the industry average, sales and earnings growth rates above that of peers, and there is diversification within an industry niche.

What about caution flags that management might not be trustworthy? Dow admits they're rare but does recommend searching for debt levels that don't exceed 30 percent of total market capitalization, for the highest grades from the major credit-rating agencies and for top managements who own a substantial amount of the stock.

"A-rated stocks have outperformed the S&P 500; that's a powerful case for not just buying a stock but owning a company for a period of time," Dow said.

Trading strategist and author Robert Deel calls that a sucker's bet.

"The little guy gets screwed by the buy-and-hold mentality because very few people put in the stops," or know when it's finally time to sell, he said.

Deel says the key is finding the right entry point, and believes that's where the concept of traditional investing and momentum come together, though the time horizons on the two approaches are vastly different.

"An individual doesn't benefit from tying up his money for long periods," he said.

E-mail Janet Kidd Stewart at yourmoney@tribune.com.

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